Money Market

KSB
Introduction
• It is not a single market but collection for several instruments
• Wholesale market of short-term debt instrument –without collateral
• Main players are :RBI, DFHI, MF, Insurance Cos, Banks,
NBFCs, Provided & PDs
• DD & SS for short term credit shape the dynamics of the market
• Why MM exist: To provide a balancing mechanism to even out the
mismatch of demand & supply
• Role of RBI: As a regulator as well as participant
Instruments
• Treasury Bills
• Cash Management Bills
• Call Money Market-Call(overnight) tom short notice(14 days)
• Commercial Papers(CPs)
• Certificate of Deposits (CDs)
• CBLO
• Commercial Bills
Treasury Bills
 contd.
Issued by RBI on behalf of the Govt. and is the
predominant buyer/holder of TBs (77-97%)

Major market players: RBI, Commercial Banks,

State Govts. Foreign Central Banks, NBFCs, State
Pension Funds and Eligible Provident Funds

Treasury Bill rate is the rate of interest at which treasury

bills are sold by RBI
(Effective Return= (Redemption Value- Sales Price )/ Sales Price )

Volume of Treasury Bills Variation can

undermine Monetary Policy depending on the
extent of Importance as a Part of Liquidity Ratio
5
Minimum amount for bidding is Rs.25000 or in
multiple of that
Major Policy Reform in TBs Market: Chakravarty &
Vaghul Committee Report

Types of Treasury Bills:

▪ Ad-hoc (Discontinued since 1994 with WMA system)

▪ 91-days (Money Market Reference Rate with
auction system)
▪ 182-days (Ceased to be issued since 1992. Reintroduced in 2005)

▪ 364-days (Introduced Since 1992)

TBs: Characteristics
• They are negotiable instrument
• Highly Liquid
• No Default Risk
• Assure Yield
• No Scrip. SGL and CSGL
Recent development in TBs market

Throughout the period the yield on 364-day TBs has

been higher than the yield on 91-day TBs.

The 364-day TBs market has been more volatile than

91-day TBs market during the liberalization period
1993-94 to 2006-07

The relative share of 364- day TBs are higher than

91-day and 182- day TBs
8
 Treasury Bills Market in
India
(1999-2000 to 2006-07)
Item 2003-04 2004-05 2005-06 2006-07
1.Implicit Yield at Cut-off price (Percent)
14-day TB: 91- n 9 364-day TBs
Minimum da di 1
Maximu y n -
m TB g d
Average S at a
91-day TB: Minimum 18 Y y
2- ea T
Maximu
da r B
m
y E S
Average n
T 1
182-dayTB: Minimum d
B 8
Maximum S ( 2
Averag 36 R -
e 4- s. d
364-dayTB: da C a
Minimum y ro y
Maximu T re T
m Bs ) B
Average 4 1 S
2. Gross Issues (Rs. Crore) . 4-
14-day TBs O d
91-day TBS u a
182-day TBS t y
s T
364-day TBs
t B
3. Net Issues (Rs. Crore) s
a
14-day TBs
 - - - - -
- - 27792 - -
- - - - -
4.16 4.3 47132 5.12 5.41
5.47 7 6.69 8.10
4.63 5.6 5.51 6.80
- 1 5.29 5.61
- 4.9 6.74 8.20
- 9 5.65 6.87
4.31 - 5.58 5.90
5.49 - 6.61 7.98
4.67 - 5.87 7.07
4.4
- 3 - -
36789 5.7 103424 131577
- 7 26828 36912
26136 5.1 45018 56813
6
- - -
2485 - -11474 28911
- 10059
9771 7435
2
10 -2114 8795
-
- 4713
- -
2
7139 16318 46229
- 9771 17208
-
28136 45018 53813 9
2065
3
-
2099
7
Cash Management Bills
• Same as T-Bills
• Only Difference is : Tenure is less than 91 days
• Introduced in 2010
• Qualified for SLR maintenance
Commercial Papers
Commercial paper (CP)
CP is an unsecured money market instrument issued in
the form of a promissory note by a corporation with
high credit ratings to finance its short-term needs.
CPs can be issued in a wide range of denominations, can
be either discounted or interest-bearing, and usually have
a limited or nonexistent secondary market.
The other names of CPs are : Finance Paper, Corporate
Paper, Euro Commercial Papers

CPs were launched in major international financial markets

in 1989-90 (Canada 1950s) and in India from 1990.

12
CPs can be issued on discount to face value basis or
on a fixed interest basis.

CPs are unsecured, negotiable by endorsement and

normally have a buy-back facility

CPs as a source of short-term debt regarded as

highly safe, simple, flexible, and quality liquid
instrument

Like other money market rates, CP rates are also

influenced by the changes in the Bank rate.
CPs have a very flexible Maturity
The maturity can be tailored to the needs of the buyers
with the most common having maturities of 90 days

The yield on CPs : > yield on TBs of the same

maturity , < prime lending rate of banks ,
> commercial bank deposit rates

Primary market for CPs is quite substantial than the

secondary market
Preferred for short term/interim financing rather long
term financing
CPs in India
Introduction of CPs in India: Announced in the
RBI Monetary and Credit Policy in 1989 and
formally introduced in the market on January 1, 1990.

Introduction of CPs in India : Recommendation of RBI

working group on money market (1987)

Any private or public sector company can issue CPs. The

transaction costs of CPs includes stamp duty, the
dealer’s fees, rating agency fees, stand by facility charges
of bank.

A corporate after issuing CPs will lose a portion equal to

the amount of CPs as the working capital limits with banks
RBI Guidelines for Issue of CPs
a) CP can be issued in denominations of Rs.5 lakh or multiples
thereof.
b) Every issue of CP, including renewal, should be treated as a
fresh issue.
c) There is no lock in period for CPs
d) CP can be issued for maturities between a minimum of 7
days and a maximum up to one year from the date of issue
e) Mandatory credit rating for issuance of Commercial Paper.
The minimum credit rating shall be P-2 of CRISIL and A2
for ICRA.
Certificate of Deposits
CDs in India
• Introduction of CDs in 1989 : recommendation of RBI working group
on money market (Vaghul working group, 1987)

• Broad objective is to further widen the range of money market instruments and
to give investors greater flexibility in the deployment of short term surplus
funds
• CDs can be issued by (i) scheduled commercial banks excluding Regional Rural
Banks (RRBs) and Local Area Banks (LABs); and (ii) An FI may issue
CDs within the overall umbrella limit fixed by RBI

• CDs can be issued to individuals, corporations, companies, trusts, funds,

associations, NRIs (on non- repatriable basis)

• CDs may be issued at a discount on face value.

• All CDs were subject to cash reserve ratio (CRR) and statutory liquidity ratio
(SLR) requirement , on the issue price of the CDs.

18
 Banks / FIs cannot grant loans against CDs and cannot buy-
back their own CDs before maturity.

 CDs are freely transferable by endorsement and delivery

 RBI Guidelines for Issue of CDs with respect to The maturity

period, Minimum Size of Issue and Denominations modified
from time-to-time

 Mutual funds are allowed to invest in CDs with cretin

limit stipulated by Securities Exchange Board of India (SEBI)

 Existence of favorable supply and demand factors for

growth of CDs market
Issue of Certificate of Deposit and Commercial Paper
by scheduled Commercial Banks in India
CDs Outstanding Rate of Discount CPs Outstanding Rate of
(Rs. Crore) (Rs. Crore)
(%) End Year Discount
End Year End Year (%) End
Year

1993-94 5142 7-12 1993-94 3264 11-12

1994-95 8017 10-15 1994-95 603 14-15.50
1995-96 16316 12-22.25 1995-96 76 20.2
1996-97 12134 7-14.25 1996-97 646 11.3-12.5
1997-98 8491 7-14 1997-98 3413 8.3-12
2001-02 1576 5-10.03 2001-02 7224 7.4-10.2
2002-03 908 5.7-10 2002-03 5749 6.0-7.75
2003-04 4461 3.87-5.16 2003-04 9131 4.7-6.5
2004-05 12078 4.2-6.34 2004-05 14235 5.2-7.25
2005-06 43568 6.50-8.94 2005-06 12718 6.69-9.25
2006-07 93272 10.2-11.9 2006-07 17898 10.25-13
• The maximum interest rates on CDs have been mostly
higher than the maximum interest rates on CPs

• There is an inverse relationship between liquidity

in the economy and the amount of CDs issued.

• Interest rates on CDs and CPs increased between

1993-94 to 1995-96 and declined thereafter till 2006-
07
• HW: What happened after that?
Commercial Bills
Introduction
• Commercial Bill Market: Bill of exchange as the short-
term financial instrument

• An asset which is shiftable i.e. negotiable and self

liquidating with low degree of risk

• As per Indian Negotiable Act, 1981

It is a written instrument containing an unconditional
order, signed by the maker, directing a certain person to
pay a certain sum of money only to or to the order of, a
certain person, or to the bearer of the instrument
 contd.

Usually maturity of bills varies from 30, 60 or 90 or

120 days

Bill financing facilitates the establishment of

an efficient system of payments and promotes
efficient use of credit

Rediscounting of bills develops a Secondary market

Market for long term bills exist in India through IDBI

& SIDBI

In its traditional form known as Hundi

Classification of Commercial Bills
Classification of Commercial bills can be made on
the basis of their maturity, title of goods, nature of
transaction and parties involved, types of activity

▪ Demand Bill
▪ Usance or Time Bill
▪ Documentary Bills
▪ Inland Bills
▪ Foreign Bills
▪ Accommodation Bills
▪ Supply Bills
▪ Long term Bills
Bill Market Rates
• The rate which can be used to indicate the cost of bill
finance. The Relevant Rates:
▪ Bank rate
▪ Bazzar bill rate (small traders)
▪ Commercial bank’s bill finance rate
▪ SBI discount rate
• Long term bill finance rate is lower than short-
term bill finance rate
Volume of Bill Finance
• The share of bill finance in the total bank credit
is quite small; it has varied between 8 to 22 %
during
1950-51
Years Inland Bills Total Bill finance as a %
Foreign of total
Bills Bank credit
1990-91 5711 4609 10320 8.87
1993-94 8337 9481 17818 10.84
1994-95 11214 13406 24620 11.64
1995-96 13721 15624 29345 11.55
1996-97 12792 13986 26778 9.62
2001-02 23314 18803 42117 7.14
2002-03 25768 21374 47142 6.46
2003-04 28699 22846 51545 6.13
2004-05 32787 27430 60217 5.47
2005-06 43730 32892 76622 5.08
2006-07 47212 40075 87287 4.52

• The rate of growth in total volume of finance is

modest since 2002-03 to 2006-07
Well Developed Bills Market
Characteristics

▪ Well established practice of borrowing against

commercial bills
▪ Preference of commercial banks to use of bill of
exchange as an instrument for providing credit
▪ Well developed secondary market for commercial
bills
▪ Central Bank support for rediscounting bills
▪ More number of market participants
▪ Low transaction cost mechanism and simplicity
of access
RBI Initiatives
RBI has been attempting to develop bill market with
major initiatives :

Bill Market Scheme of 1952

Bill Market Scheme of 1970
▪ To enable small transactions to be covered by the facility
▪ To provide bill finance throughout the year and not just to
meet seasonal stringency
▪ Increased the number of participants and all commercial
banks
▪ Developing a secondary market for bills to rediscount bills
 contd.
Various committees of RBI also put forward strong
argument in favour of development of Commercial Bill
(Tandon Committee, Chore Committee, Chakravarty
Committee and Vaghul Working Group) Since 2005 it is
now a Interbank bill market

Factors Behind Under Development:

▪ Lack of support from Commercial Banks

▪ Foreign Trade at its initial stage of growth
▪ Lack of effective secondary market for commercial
bills
▪ Competing money market instrument
▪ Lack of specialised credit information agencies
Call Money Market
Introduction
• That part of national money market where the day-to-
day surplus funds, mostly of banks are trated in
• Ultra Short-term in nature
• Seasonal in Nature : High in a boom period & Low in
Slack

• Call loans are given in India:

▪ To bill market
▪ For the purpose of dealing in the bullion markets and
stock exchanges
▪ Between Banks
32
 contd.

Size of the call money market indicative from the Total

Turnover(borrowing) in the market

Call Rate: Rate of interest paid on call loans by the

demand and supply of call loans…

Market determined since 1989 Year Average

Call Rates
Two Call Rates 1955-56 2.75%
▪ The Interbank Call Rates 1988-89 9.77%
1991-92 19.57%
▪ Lending Rate of DFHI 1996-97 7.84%
2002-03 5.89%
2006-07 7.22% 33
Participation
Major Participants in the call money market:
▪ Scheduled Commercial Banks
▪ Foreign Banks
▪ State, District and Urban Co-operative Banks
▪ Discount and Finance House of India(DFHI)
▪ Securities Credit Corporation of India(STCI)

STCI & DFHI borrow as well lend like banks and

Primary dealers in the call market
Continuous Participation of market Players helps
to integrate long-term & short-term money
markets in the economy. 34
Relative Shares in Call/Notice Money Market
(percentages)
Year Borrowings Lending
Banks PDs Banks PDs Non-Banks

2000-01 67 33 47 12 41
2001-02 62 38 65 10 25
2002-03 53 47 69 2 29
2003-04 36 64 57 2 41
2004-05 65 35 70 1 29
2005-06 76 24 95 1 4
Volatility in the Money Market in India
(percentages)
Item April 1993 April 1996 April 2000
to March 1996 to March 2000 to March 2007
Call Money 11.1 8.0 6.3
Average 6.7 3.7 1.9
(percentage) SD 0.6 0.6 0.3
CV
Term Money - - 6.5
Average - - 1.4
(percentage) SD - - 0.2
CV
Market Repo - - 5.4
Average - - 1.1
(percentage) SD - - 0.2
CV
CBLO - - 5.3
Average - - 1.1
(percentage) SD - - 0.2
CV

36
Reasons for Call Rate Volatility
▪ Requirement for CRR needs create excess demand for liquidity
in call money market
▪ Over extended credit position of Banks
▪ Occasional market disruptions
▪ Heavy withdrawal by Institutional investors
▪ Sluggish demand in bank deposit with heavy pressure for non-
food credit in the banking sector crating asset liability mismatch
▪ Causality in foreign exchange market and call money market
▪ Structural deficiencies in the Banking Sector
▪ Reduction of Volatility followed by introduction of LAF
and other policy measure such as market Repo and CBLO

37
Policy Development
 Operationalisation of the Negotiated Dealing System (NDS)/Clearing Corporation
of India Ltd. (CCIL)
 Primary Dealers (PDs) are introduced in market 1996-97
 Introduction of LAF and the setting up of an informal corridor of reverse repo and
repo rates.
 Call money market is now a pure inter-bank market (2005)

 Prudential measures are :

i. Banks are allowed to borrow a maximum of 125 percent of their capital funds on
any day during a fortnight, and lending outstanding for commercial banks
should not exceed 25 percent of their capital funds.

• Banks are allowed to lend a maximum of 50 percent of their capital funds on

any day during a fortnight

38
 contd.

ii. Borrowings outstanding by co-operative banks

in call money market on a daily basis should
not exceed 2 percent of their aggregate deposits
as at end March of the previous financial year,
and for lending there is no limit for them

iii. Primary Dealers are allowed to borrow, on average

in a reporting fortnight up to 200 percent of
their net owned funds as at end March of the
previous financial year and they are allowed to
lend in the call money market, on average
in a reporting fortnight up to 25 percent of their
net owned fund.
• As per Vaghul Working Group on Money Market : Over emphasis
on call money market weakens the monetary policy technique

• https://www.ceicdata.com/en/india/call-money-rate